Homework 6 Answer Key a b c b c d a b c d Notes Correct answers highlighted in green explanation provided when deemed necessary Q1 If a country allows trade and for a certain good the domestic price without trade is higher than the world price the country will be an exporter of the good the country will be an importer of the good the country will be neither an exporter nor an importer of the good Additional information is needed about demand to determine whether the country will d be an exporter of the good an importer of the good or neither Q2 The nation of Woodland forbids international trade In Woodland you can exchange 1 pound of chicken for 5 pounds of salt In other countries you can exchange 1 pound of chicken for 7 pounds of salt These facts indicate that a Woodland has a comparative advantage relative to other countries in producing chicken other countries have an absolute advantage relative to Woodland in producing chicken the price of chicken in Woodland exceeds the world price of chicken if Woodland were to allow trade it would export salt Explanation The opportunity cost of a chicken is higher abroad 7 pounds of salt than it is domestically 5 pounds Therefore Woodland has a comparative advantage in the production of chicken Q3 When in our analysis of the gains and losses from international trade we assume that a country is small we are in effect assuming that the country cannot experience significant gains or losses by trading with other countries cannot have a significant comparative advantage over other countries cannot affect world prices by trading with other countries All of the above are correct Q4 Economists claim that trade raises the economic well being of a nation because the gains of the winners exceed the losses of the losers everyone in an economy gains from trade since countries can choose what products to trade they will pick those products that are c most beneficial to society the nation joins the international community when it begins to engage in trade a b d Q5 Consider the following diagram presenting the market for calculators in Finland Without trade the price of a calculator in Finland would be 12 and 300 calculators would be consumed by Finnish buyers Consumer surplus without trade would be 2250 and producer surplus would be 1500 With trade the price of a calculator is 7 Finnish consumers buy 400 calculators while Finish sellers produce 150 calculators Consumer surplus with trade is 4000 producer surplus is 375 and therefore the gains experienced by Finland from opening itself to trade in the calculator market are 625 Explanation Without trade subscript NT the eq price is that which equates domestic supply and demand That price is 12 At that price quantity supplied and demanded is 300 With trade subscript T the price drops down to 7 which is the world price At that price consumers demand 400 calculators while Finnish producers are only willing to produce 150 This results in Finland having to import 250 calculators We thus have that Total surplus before and after trade is respectively The difference gives us the gains from trade 625 a b c d a b c Q6 The before trade domestic price of peaches in the United States is 40 per bushel The world price of peaches is 52 per bushel The U S is a price taker in the market for peaches If trade in peaches is allowed the price of peaches in the United States will increase and this will cause consumer surplus to decrease will decrease and this will cause consumer surplus to increase will be unaffected and consumer surplus will be unaffected as well could increase or decrease or be unaffected this cannot be determined Explanation Domestic producers are no longer willing to sell a bushel of peaches for 40 Instead they want 52 which is the price they can get by exporting their peaches This increase in price decreases the quantity demanded in the US So we have fewer people buying peaches and at a higher price which necessarily reduces consumer surplus in the US Q7 If the United States imports televisions and the U S government imposes a tariff on televisions then total surplus in the American television market decreases producer surplus in the American television market increases U S imports of foreign televisions decrease d All of the above are correct Explanation A tariff on imported televisions creates a DWL as we saw in class therefore option A is true However the tariff allows producers to sell more TVs and at a higher price which necessarily raises producer surplus This means option B is true Finally because the new price of TVs is now equal to the world price plus the tariff US citizens will demand fewer of them making option C correct as well Q8 Suppose Iran imposes a tariff on lumber For the tariff to have any effect it must be the case that a Iran is an exporter of lumber the domestic quantity of lumber supplied exceeds the domestic quantity of lumber b demanded at the world price without the tariff the world price without the tariff is less than the price of lumber without c trade d the world price without the tariff is greater than the price of lumber without trade Explanation C must be true as otherwise Iran would have be exporting lumber instead of importing it Q9 Consider the following diagram which represents the market for wheat in Coldland Suppose that the world price of a bushel of wheat is 4 Coldland initially had no barriers to trade but under pressure from its domestic wheat farmers it is considering passing a 2 tariff on each imported bushel of wheat By how much will imports of wheat decrease Answer 20 How much surplus will be transferred from consumers to producers if the tariff passes Answer 30 What will be the deadweight loss from the tariff Answer 20 What will the government s revenue be if it passes the tariff Answer 40 Explanation The following diagram includes the world price and the world price plus the 2 tariff It can be seen from the diagram that without the tariff the country imports Qd Qs 50 10 40 bushels of wheat With the tariff the country imports 40 20 20 bushels The reduction in the imports of wheat is therefore equal to 20 bushels Since 20 bushels are imported under the tariff government revenue from the tariff is 20 2 40 The surplus transferred to producers is equal to the increase in producer surplus PS with trade and without tariff is PS with trade and with tariff is The surplus transferred is then 30 The deadweight loss is given by a b c d Q10 A quota is a tax placed on